Area 6 of 7
Financing
Deeds of trust rather than mortgages, trustee's sale rather than judicial foreclosure, and the loan brokerage rules that sit between DRE and the SAFE Act.
9%
of the examination
~14
of 150 questions, derived from the weight
8
sub-topics DRE lists here
Why this area carries 9%
Nine percent is about fourteen questions, and they concentrate in a small number of places. California uses deeds of trust rather than mortgages, forecloses non-judicially rather than through a court, and layers two distinct anti-deficiency protections on top. Those three facts generate a disproportionate share of the questions in this area.
The rest divides between loan mechanics that transfer from any jurisdiction, and the federal disclosure statutes: Regulation Z, RESPA, ECOA and the Fair Credit Reporting Act. Those four are testable by name, so learn which statute governs which subject rather than trying to hold the detail of each.
Two California-specific rules round it out: Article 7, which caps commissions and costs on certain broker-arranged loans, and the interaction between a DRE licence and the SAFE Act mortgage loan originator endorsement. Neither appears in national material.
Every topic DRE lists here
8 topics, reproduced from the DRE content outline. DRE's own caveat applies: the lists are informational and not totally comprehensive, because the test merely samples the broad field of real estate.
- 01General Concepts
- 02Types of Loans
- 03Sources of Financing
- 04Government Programs
- 05Mortgages/Deeds of Trust/Notes
- 06Financing/Credit Laws
- 07Loan Brokerage
- 08Types of Loan Originators
Why California uses a deed of trust
A mortgage has two parties: the mortgagor who borrows and the mortgagee who lends. Because there is no neutral third party, enforcing it requires going to court, which is judicial foreclosure.
A deed of trust has three. The trustor is the borrower who conveys, the trustee holds bare legal title as a neutral third party with a power of sale, and the beneficiary is the lender. The power of sale is what lets the trustee conduct a sale without a court, which is why the instrument dominates California lending. That speed is the whole point of the structure.
In both instruments the borrower keeps possession and equitable ownership. Neither transfers ownership to the lender on default, and any answer saying otherwise is wrong.
| Mortgage | Deed of trust | |
|---|---|---|
| Parties | Two: mortgagor, mortgagee | Three: trustor, trustee, beneficiary |
| Foreclosure | Judicial, through a court | Non-judicial trustee's sale under power of sale |
| Typical timeline | Long, often over a year | About four months from notice of default |
| Deficiency judgment | Available after judicial foreclosure | Barred after a trustee's sale |
| Borrower redemption after sale | Statutory redemption period applies | None |
The non-judicial timeline, and what each side gives up
The sequence is fixed and worth memorising as a sequence rather than as isolated numbers. The beneficiary instructs the trustee to record a notice of default. A three-month reinstatement period runs. A notice of sale is then published, posted and mailed at least twenty days before the sale date. The trustee conducts the sale.
The trustor may cure the default and reinstate up to five business days before the sale date. After that point only full payoff will stop it. That five-day cut-off is a favourite examination detail.
The trade-off is symmetrical. The lender gets speed but gives up the right to a deficiency judgment. The borrower loses any post-sale redemption right but cannot be pursued for the shortfall. Judicial foreclosure reverses both: the lender may pursue a deficiency, and the borrower gets a statutory redemption period.
Two separate anti-deficiency protections
The first attaches to the method: a trustee's sale forecloses any deficiency claim regardless of loan type. The second attaches to the loan: purchase-money protection bars a deficiency on a loan used to buy an owner-occupied dwelling of one to four units, whichever foreclosure method is chosen. Questions frequently test whether you know both exist independently.
The clauses that change a loan's behaviour
Five clauses generate most of the questions in this topic, and each has a single defining function.
- Acceleration
- Makes the entire balance immediately due on a stated event, usually default. Without it a lender could only sue for missed payments.
- Due-on-sale, or alienation
- Lets the lender call the balance due on sale or transfer. It is why loan assumption is uncommon on conventional loans, and why an assumable FHA or VA loan has real value when rates have risen.
- Prepayment penalty
- Charges the borrower for paying early. It is the opposite concern from a due-on-sale clause, which charges nothing but blocks assumption. Federal rules now restrict prepayment penalties sharply on residential loans.
- Subordination
- Lets an existing lien voluntarily take a lower priority than a later one. Essential in development, where a construction lender insists on first position and a seller who carried back financing must step behind. It materially reduces that seller's security.
- Defeasance
- Cancels the security instrument when the debt is paid, releasing the property. In a deed of trust this is effected by a reconveyance from the trustee.
Loan structures and how the payment behaves
A fully amortized loan carries a level payment that fully repays principal and interest over the term. Because interest is charged on the outstanding balance, the interest portion of each payment falls over time while the principal portion rises, with the total payment unchanged. That shifting composition is the most tested property of amortization.
A straight or interest-only note pays interest only, with the whole principal due at the end. A partially amortized loan amortizes on a longer schedule than its term, leaving a balloon payment. A negatively amortizing loan has a payment smaller than the accruing interest, so the shortfall is added to the balance and the borrower owes more over time. Federal ability-to-repay rules now exclude negatively amortizing loans from qualified mortgage status, which has made them rare in residential lending.
An adjustable rate mortgage moves with an index plus a margin, subject to periodic and lifetime caps. The index is the market rate that moves. The margin is the lender's fixed addition. Together they make the fully indexed rate.
- Loan to value
- Loan divided by the lesser of price or appraised value. Above 80% a conventional lender normally requires private mortgage insurance, which protects the lender rather than the borrower.
- PMI cancellation
- Under the Homeowners Protection Act, PMI must be cancelled automatically at 78% LTV on the original amortization schedule, and a borrower may request cancellation at 80%. FHA mortgage insurance follows different rules and often runs for the life of the loan.
- Points
- One point is one percent of the LOAN amount, not of the price. Discount points buy down the rate. Origination points pay the lender for making the loan.
- Wraparound and all-inclusive
- A junior loan that wraps an existing senior loan, with the seller collecting on the whole and continuing to service the underlying debt. It fails immediately if the senior loan has a due-on-sale clause.
FHA, VA, Cal-Vet and the secondary market
Keep four roles separate and this topic resolves. FHA insures loans made by approved lenders, which allows lower down payments. VA guarantees a portion of a loan against the lender's loss, which is what permits no down payment at all. Neither lends directly in the ordinary residential case. Cal-Vet is different again: the California Department of Veterans Affairs actually buys the property and sells it to the veteran under a contract of sale, which is a genuine California distinction.
The secondary market buys closed loans from originators, returning capital so they can lend again. Fannie Mae and Freddie Mac purchase conventional conforming loans, and Ginnie Mae guarantees securities backed by government-insured loans. The secondary market does not make second mortgages, does not set interest rates and does not insure loans, and each of those is a plausible-sounding wrong answer.
VA also requires a Certificate of Reasonable Value, and the borrower may not be charged certain fees. Eligibility depends on qualifying military service rather than first-time buyer status.
The federal statutes, by subject
Learn which statute governs which subject. That is almost always what the question is testing.
- Truth in Lending Act, Regulation Z
- Disclosure of the cost of credit, expressed as the annual percentage rate. Stating a trigger term in an advertisement, such as the down payment, the payment amount, the number of payments or the finance charge, requires full disclosure of all terms. The APR may be stated alone without triggering anything, which is deliberate.
- RESPA
- Settlement practice. The Loan Estimate is due within three business days of application, and the Closing Disclosure must be in the borrower's hands at least three business days before consummation. Section 8 prohibits kickbacks and unearned referral fees for settlement services, and Section 9 bars a seller from requiring a particular title insurer.
- Equal Credit Opportunity Act
- Prohibits credit discrimination on race, colour, religion, national origin, sex, marital status, age, and because part of an applicant's income comes from public assistance.
- Fair Credit Reporting Act
- Governs the accuracy, use and disclosure of consumer credit reports, including the borrower's right to know when a report was used adversely.
- Ability to repay and qualified mortgages
- A lender must make a reasonable good-faith determination that the borrower can repay. Qualified mortgage status carries a presumption of compliance and excludes negative amortization, interest-only periods and terms over thirty years.
Article 7, loan brokerage, and the SAFE Act
Article 7 of the Real Estate Law caps the commission and the costs and expenses a broker may charge on qualifying broker-arranged loans, with the limit varying by the size and term of the loan. It applies to first trust deeds under a threshold amount and to junior liens under a lower one. It is one of the most distinctly Californian financing rules, and it appears reliably.
A DRE licence authorises mortgage loan brokerage activity. The federal SAFE Act layers a further requirement on top for residential mortgage loan origination: a mortgage loan originator endorsement obtained through the Nationwide Multistate Licensing System, carrying a unique identifier that appears on loan documents. The two operate together rather than as alternatives, which is the point candidates most often get wrong.
A broker arranging a hard money or private loan also owes the lender-investor a mortgage loan disclosure statement, because in that transaction the private lender is a principal who needs to understand what they are buying.
Usury, and the exemption that swallows the rule
The California constitutional usury limit is 10% a year for loans primarily for personal, family or household purposes, and the greater of 10% or 5% above the Federal Reserve Bank of San Francisco discount rate for other loans.
The practical answer, though, is that the limit rarely binds, because loans made or arranged by a licensed real estate broker are exempt, as are loans by banks, savings institutions and most institutional lenders. The exam tests whether you know both the rule and the breadth of the exemption, so an answer that states the cap without acknowledging the broker exemption is usually incomplete.
What candidates confuse
Each pair below is one the exam deliberately tests. If you can state the difference in a sentence, the question answers itself.
MortgageDeed of trust
Two parties and judicial foreclosure, versus three parties and a non-judicial trustee's sale under a power of sale.
TrusteeBeneficiary
The trustee is the neutral third party holding bare legal title with power of sale. The beneficiary is the lender who benefits from the security.
FHA insuresVA guarantees
FHA insures the lender against loss, allowing a low down payment. VA guarantees a portion of the loan, which is what permits no down payment. Neither lends directly.
Due-on-sale clausePrepayment penalty
A due-on-sale clause calls the balance on transfer. A prepayment penalty charges for paying early. They address opposite events.
IndexMargin
The index is the market rate that moves. The margin is the lender's fixed addition. Together they make the fully indexed rate.
Primary marketSecondary market
The primary market originates loans to borrowers. The secondary market buys closed loans from originators, and it has nothing to do with second mortgages.
Points on the loanPercentage of the price
One point is one percent of the LOAN amount. Calculating it on the purchase price is a reliable way to get the arithmetic wrong.
DRE licenceMLO endorsement
The licence authorises brokerage activity. The SAFE Act endorsement authorises residential mortgage loan origination. Both are needed together, not one or the other.
The arithmetic in this area
Every formula the exam draws on here, with the mistake each one invites.
loan / lesser of price or appraised valueAbove 80% conventional lenders normally require PMI.
price - loan amountThen divide by price for the down payment percentage.
loan amount x points percentOne point is one percent of the LOAN, never of the price.
principal x rate x timeThe exam's default unless the question says otherwise.
index + marginSubject to periodic and lifetime caps on an adjustable rate loan.
Worked scenario
Read the setup, decide your answer, then check the reasoning.
A borrower buys an owner-occupied home for $900,000 with a $720,000 purchase-money loan secured by a deed of trust. Three years later they default. The property is now worth $640,000. The lender is considering how to proceed.
- The non-judicial route
- The trustee records a notice of default, a three-month reinstatement period runs, a notice of sale is published and posted at least twenty days before the sale, and the trustee sells. The borrower may reinstate up to five business days before the sale date. The whole process typically runs about four months.
- Whether a deficiency is available
- No, on two independent grounds. A trustee's sale forecloses any deficiency claim regardless of loan type. Separately, this is a purchase-money loan on an owner-occupied one-to-four unit dwelling, so purchase-money anti-deficiency protection bars a deficiency even if the lender chose judicial foreclosure instead.
- What the LTV tells the lender
- The loan was 80% of the original price, so no private mortgage insurance would ordinarily have been required. With the property now at $640,000 against a balance near $720,000, the lender is undersecured and has no route to the shortfall. This is precisely the risk the 80% threshold exists to manage.
The trap
The common error is to treat the two anti-deficiency protections as one rule, and to conclude that a lender who chooses judicial foreclosure can therefore pursue the deficiency. On a purchase-money loan for an owner-occupied home they cannot, because the second protection attaches to the character of the loan rather than to the method of foreclosure.
Try a question
One question from the 18 in this area. Answer it, then work through the rest.
California lenders overwhelmingly use a deed of trust rather than a mortgage. What practical difference matters most to a defaulting borrower?
Written to DRE's published topic list. Not a real examination question, since reproducing those is a misdemeanour under B&P Code section 123.
Before exam day, you should be able to
Not a list of things to have read. A list of things to be able to do, out loud, without notes.
- Name the three parties to a deed of trust and what each does
- Recite the non-judicial foreclosure timeline including the five-business-day reinstatement cut-off
- State both anti-deficiency protections and explain why they are independent
- Explain what a due-on-sale clause does and why an assumable loan has value
- Describe how the interest and principal portions of an amortized payment change over time
- Say who insures, who guarantees, and who buys on the secondary market
- Match each federal statute to the subject it governs
- State the Regulation Z trigger terms and the one figure that triggers nothing
- Explain what Article 7 caps and when it applies
- Explain why a DRE licensee still needs an NMLS endorsement to originate residential loans
Common questions
The question counts above are derived: DRE publishes the percentage weight for each area, not a question count. Multiplying each weight by 150 and rounding gives figures that sum to 152 rather than 150, which is why every count on this site says “about”.